Shares of MetLife Inc. dropped nearly 9% Tuesday following a decision to boost reserves for missing pension payments, focusing new scrutiny on MetLife management and internal controls at the insurance giant.
MetLife lost track of possibly tens of thousands of retirees owed monthly pension benefits and reduced reserves tied to these pension obligations. In effect, it increased its profits from a failure to more aggressively track down the recipients.
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The insurer said Monday it would increase reserves by $525 million to $575 million on a pretax basis. Federal securities and state regulators have inquired about the mix-up. Shares ended Tuesday down $4.67, or 8.6%, at $49.73. It was MetLife's largest one-day percentage decrease since a 9.5% drop in August 2016.
Analysts said the events raise new questions among investors about confidence in the company and management. "There will be greater investor pressure to consider management changes, including external candidates," according to a note from Evercore ISI.
Some MetLife executives could be removed from their positions because of the pension snafu, said a person familiar with the situation. "Some people involved in the problem are already gone," this person said.
MetLife Chief Executive Officer Steven Kandarian was in favor of disclosing the extent of the mistake, said the person familiar with the situation. The problem, this person said, originated with "decisions made long ago."
"He has spent his career as CEO cleaning up the mess of the past," the person said.
A MetLife spokesman declined to comment.
MetLife waived its policy that the CEO step down at 65 for Mr. Kandarian, who turned that age last March. He has been president and CEO since May 2011. Nevertheless, the board already is grooming internal candidates to succeed Mr. Kandarian, according to this person.
MetLife said Monday that an earlier decision to release reserves that had been set aside for customers owed the pension benefits was the result of a "material weakness in internal control over financial reporting." That means the company had a flaw in its policies or procedures that are intended to ensure its financial statements are accurate.
MetLife didn't elaborate on exactly why it had released the reserves, or in what years the reserves were released. Some analysts have said the problematic accounting could have begun well over a decade ago.
The company said it is "not aware of any intentional wrongdoing in connection with this matter."
Insurers gauge their proper level of reserves for such obligations by taking the total amount they expect to have to pay, and then discounting it back to present value and adjusting it for other factors.
Releasing those reserves would generally have boosted MetLife's earnings. The company recorded $1.6 billion in net income in the first nine months of 2017.
"The magnitude of the charge was significantly larger than we expected, and will likely be heavily scrutinized by regulators," Morgan Stanley analysts said in a research note.
Another concern, according to Evercore, is that the insurer's failure to pay possibly tens of thousands of people owed monthly pension benefits may portend problems in other product lines.
MetLife said Monday that it had begun a "global review of its processes and procedures for identifying unresponsive and missing policyholders and beneficiaries for the other insurance and annuity products it offers."
Evercore said "this review will remain an overhang for the shares until it's completed."
--Michael Rapoport contributed to this article.
Write to Joann S. Lublin at email@example.com
(END) Dow Jones Newswires
January 30, 2018 17:36 ET (22:36 GMT)
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